Healthcare

"as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit"

Food is more critical to life than medical care.

You are guaranteed to die after not eating for a few weeks. Yet most companies don't have "employer food plans" and there is no outcry for "single payer food". Concern over ensuring the poor can eat doesn't lead Americans to suggest the government grow food and run grocery stores and restaurants. Those in poverty are helped to eat through either private charity, government monetary assistance, or vouchers for food (aka food stamps). The same methods used to ensure the poor eat can be applied to healthcare. If the government is going to help it can provide vouchers for private insurance rather than using the issue as an excuse to benefit industry groups.

The former Soviet Union felt competition was wasteful. They felt food was so important government had to produce it. Obviously it turned out they were wrong and competition in a free market works far better. Healthcare policy in this country is more complicated than it needs to be since many don't apply that simple lesson. That complexity hides favors for special interests that benefit at your expense.

Question: "How much does it cost?" US healthcare: "How much have you got?"

A "consumer price index" (CPI) compares how prices change over time. US medical prices have increased as fast as average disposable income, much faster than other prices:

Top red line: average per person disposable income (i.e. after tax income) starting in 1959 (the earliest data available).

Middle blue line: CPI for medical care.

Bottom green line: CPI for everything aside from medical care.

All values from that graph are scaled to start at 100 to allow comparison. Incomes and medical prices are almost 20 times what they were (not adjusted for inflation). We can afford 2.5 times more of everything than we could in 1959, on average, except medical care. Medical costs behave far differently than the vast majority of our economy because government grants favors to big corporations and politically connected groups. It protects them from the competition that keeps other prices in check.Most people have no idea how many ways the government prevents the healthcare market from functioning well. (even experts have missed some of the issues on this page). The only hope of fixing the system is for the public to take time to learn.

The problem is worse than that graph indicates because the amount we spend on healthcare has risen much faster than its price. We buy around 3 times as much medical care as we used to, taking into account the increased prices. Data from the OECD is available for 1960-2010:

The share of income we spend "out of pocket" has decreased over time because people are concerned with keeping their own spending under control. The rest of the money is spent by government and private companies and most never directly passes through our hands. The government tries to shield us as much as possible from directly paying so we don't shop around to keep spending under control. A "Healthcare Blue Book" shows the same medical procedure may be 5-10 times cheaper within the same geographic area. One surgeon reports a package deal price on a particular procedure is $5,885 at one facility for all costs, while another charges $33,505 even before adding in physician and anesthesiologist fees. High priced healthcare providers use the government to limit the spread of low cost options.

Government prevents competition to benefit existing providers

Imagine if Apple needed to get government permission before launching a product and had been told "other companies already sell cell phones, we don't need another one" or "music players exist, the iPod isn't needed". Imagine if Apple and the makers of IBM-PC clones had been told "IBM already makes computers, there are no need for others". Imagine if Walmart, Office Depot, Best Buy and Whole Foods were told "we already have enough retailers". Yet:

"In 36 states and D.C., it is actually illegal to offer new healthcare services or purchase certain kinds of medical equipment without obtaining special permission from the government. These laws—called certificate of need or “CON” programs—establish government-imposed monopolies of service for favored established businesses. Before new healthcare services may open their doors, they must first prove to the state that their service is “necessary”—which, all too often, is simply code for proving that they won’t take any customers away from an existing business."

For example, MRI machines are among the many healthcare services that require approval. A Virginia MD "had no idea that his application for a new machine would turn into a five-year quest that would cost $175,000 in filing fees, consultant bills and attorneys expenses." Existing providers use the political process in every state to keep prices higher by limiting competition, "certificates of need" are simply one of the easiest methods to spot. The 14 states without CON regulations do "retain some mechanisms intended to regulate costs and duplication of services."

"Whether considering the projection from the Association of American Medical Colleges (AAMC) of an overall physician shortage of more than 90,000 by the year 2020, or the 2009 report prepared on behalf of the Physicians Foundation put that number at 200,000 by the year 2025, it is not difficult to understand the fundamental reasoning behind these numbers"

Recent changes in healthcare make the shortage worse by inspiring doctors to work fewer hours and increasing paperwork load. A large survey of physicians reports in 2012 they are each seeing 16.6% fewer patients than they did in 2008, and 22% plan to decrease their hours in the next few years. Another survey shows 43% of physicians may retire early within the next 5 years due to Obamacare. Survey and study results vary regarding how many really will leave practice due to Obamacare, but the number may be substantial.

"Research in Massachusetts shows that using nurse practitioners or physician assistants to their full capacity could save the state $4.2 billion to $8.4 billion over 10 years and that greater use of retail clinics staffed primarily by nurse practitioners could save an additional $6 billion"

Hospitals have even more political influence than doctors

Government pays a higher price for many procedures to hospitals than it does to individual doctors, often 2-3 times as much. Hospitals can handle the increasing paperwork to comply with new regulations more efficiently than an individual doctor. This has led a growing number of physicians to sell their practices to hospitals. This reduces competition and raises costs. As the Wall Street Journal put it "Same Doctor Visit, Double the Cost; Insurers Say Rates Can Surge After Hospitals Buy Private Physician Practices; Medicare Spending Rises Too". The Washington Post recently reported "the number of physicians who own their firms dropped from 57 percent in 2000 to 43 percent in 2009, and it’s projected to continue falling to 33 percent by 2013" and that "in 2002 about 20 percent of U.S. physician practices were hospital-owned; in 2008 that figure was over 50 percent". By 2014 a recruitment firm estimates over 75% of physicians will work for hospitals. WSJ said "nearly a quarter of all specialty physicians who see patients at hospitals are now employed by the hospitals. That is more than four times the 5% in 2000". Increased regulation helps hospitals more than it hurts them by reducing competition. They simply pass the costs along. Hospitals now own 27% of urgent care clinics, and hospitals are merging into chains to avoid competition. As the New York Times says of these growing hospital businesses:

"there are signs that the trend toward them is actually a big factor in the rising cost of private health insurance. In much of the country, health systems are known by another name: monopolies "

Most hospitals aren't for-profit businesses, yet they lobby against competition.

The US is only 43rd in the world in the number of hospital beds compared to our population, we are only at the global average of 30. In fact "From 1946 to 1996, the number of beds per 1,000 population fell by more
than 60 percent" as competition declined. Studies show hospital markets are highly concentrated, there tends to be little competition.This article notes that Milton Friedman, winner of the Nobel Prize in economics, explained in 1992 that:

"at the beginning of the 20th century, about 90% of all American hospitals were private, for-profit enterprises. State and local governments then began taking over the hospital industry. So, by the early 1990s only about 10% of all American hospitals were private, for-profit enterprises. Socialism characterizes at least 90% of all hospitals. Many other hospitals have received government subsidies, and with the subsidies come reams of regulation... The effect of this vast government takeover of the hospital industry, Friedman documented, is what any student of the economics of bureaucracy should expect: the more that is spent on hospital care, the worse the quality and quantity of care become, thanks to the effects of governmental bureaucratization. According to Friedman, as governments took over an ever-larger share of the hospital industry (being exempt from antitrust laws), ... cost per bed rose tenfold. "

Data from the American Hospital Association shows 20% of community hospitals are now for profit, though the average non-profit hospital has more beds. Even non-profit and government hospitals lobby to stifle competition since managers in any entity like to build their own empires, and their salaries tend to rise as their empires get larger. Monopolies, whether for- profit or non-profit, have less incentive to control costs, or quality (which can cost lives). Where there are competitive markets even non-profits need to compete to show they are spending donor's money better than other non-profits would, and to show customers they do a good job. For-profit entities in parts of the economy that are competitive try to lower costs to increase profits, and then need to lower prices to compete.

Managers in any organization would rather be liked by giving new perks to their staff than cut back if they can avoid it. In for-profit entities they are given more incentives to keep costs under control.Many non-profits pay high salaries to their staffs and leadersand: "Hospitals that serve a larger percentage of private payers and provide less charity care pay their CEOs more". Therearen't enough competing non-profits to force them to be more charitable to improve their image. Milton Friedman wrote that:

"Some years ago, I came across a study by Dr. Max Gammon, a British physician who also researches medical care, comparing input and output in the British socialized hospital system... He was thus led to enunciate what he called “the theory of bureaucratic displacement.” In his words, in "a bureaucratic system … increase in expenditure will be matched by fall in production. … Such systems will act rather like ‘black holes,’ in the economic universe, simultaneously sucking in resources, and shrinking in terms of ‘emitted’ production.”"

In a "concession to the powerful American Hospital Association (AHA), a supporter of Obamacare, which prefers to have its member hospitals operate without competition from hospitals owned by doctors" the "Section 6001 of the healthcare law effectively bans new physician-owned hospitals (POHs) from starting up, and it keeps existing ones from expanding." As a result of regulation "The number of physician-owned hospitals has declined from a high-water mark of about 275 before the ACA was passed to about 230 now". Less competitionincreases costs. The number of staff per hospital bed is now 11 times what it was in 1946 and still rising.

"the AMA declared war on retail medical clinics, located in places such as CVS and Wal-Mart....Congress imposed a moratorium on physician-owned, for-profit specialty hospitals in 2004, the AMA went all out to repel that threat."

The cost of routine preventative care is driven up by requiring insurance to cover it

Most
people consider toothpaste a regular part of their personal care. They
are at least somewhat cost conscious when they buy it in that most wouldn't pay $70 for a tube
of toothpaste. Yet if toothpaste were required by government to be
covered by insurance without a deductible, people wouldn't pay attention
to costs and the manufacturers could raise prices. It would add extra
overhead to run each toothpaste purchase through the insurance
company. The higher prices would lead to higher insurance rates for
everyone since everyone would take advantage of it. If you have a
regular predictable expense, it makes little sense to add extra overhead
to involve an insurance company. Insurance is meant to cover unexpected
events. Providing "free services" leads to costly overusage:
"The bottom line is that thousands of people randomly given free
medicine in the late 1970s consumed 30-40% more medical services, paid
one more "restricted activity day" per year to deal with the medical
system, but were not noticeably healthier! "

The providers of goods and services lobby to get regulators to require coverage
of their products by claiming they are doing so in the interest of the
public and that regular preventative care saves on costs. In reality
they wish to be able to raise costs. If a preventative care measure
does save costs, in a real competitive free market for insurance companies would make rational decisions to do things like offer
discounts for those those that use preventative care. Financial incentives can lead people to take
better care of themselves. Wharton business school reported
on studies showing "One Way to Lower Health Costs: Pay People to Be
Healthy" saying "Health costs as little as $3 a day. At least, that's
all it took in one
recent study for several patients to forgo bad behaviors that put their
health at risk.". They might offer discount coupons for preventative
care products which are paid for by providers as a marketing expense
just like coupons are for retail products.

Government protects insurers from competition at the expense of consumers

The battle against competition extends to the insurance industry as well. Professor Herzlinger has written there is far less innovation in healthcare because existing players prevent competition:

"Entrepreneurs avoid health-care delivery because status quo providers, abetted by legislators and insurance companies, have made it virtually impossible for them to succeed.. Time and again the regulatory status quo blocks entrepreneurship"

Large companies fear losing business to new companies with creative ideas to lower costs or improve quality. Many people don't realize existing businesses often benefit by having needless rules that are costly comply with. Those rules make it difficult for a new competitor to start which would take their customers and cost them even more money than the regulations. Corporations other than hospitals areprohibited from hiring doctors in many states . That is one of many factors inhibiting the spread of cheap retail medical clinics. Some large companies like Walgreens have the clout to get away with entering the niche in a limited fashion. Since Walgreens uses nurse practitioners, doctors groups havecomplained about its desire to expand services and the fear of being outlawed likely keeps such services limited. The rules are meant to protect existing groups at the expense of the public. Herzlinger describes examples of government being used by special interest groups to prevent competition from starting up and shut it down if it somehow does begin to thrive:

"They created a system to bring concierge medicine to the uninsured and the middle class. For $70 dollars a month, you get 24/7 access to a doctor. ...But the insurance industry charged that they were insurers and that they should be regulated the way insurers are regulated. Those words, insurance regulation, that's like striking a knife into the heart of an entrepreneur. .. I did a series of cases on a retail health clinic called Health Stop....Health Stop grew to be a $100 million company. But these guys were run out of business by the hospitals and by the community physicians who attacked them relentlessly."

"Since Obama’s January 20, 2009, inauguration, Aetna is up 80%, UnitedHealth is up 127%, Humana is up 170%, and WellPoint, another large health insurer, is up 79%, all exceeding the 67% increase in the S&P 500 Index over the same period"

"Startup health insurer shutting.. The hotly debated healthcare reform bill signed into law in March has killed a local insurance company."

After reporting a couple of years ago that an "AMA Study Shows Competition Disappearing from the Health Insurance Industry", this years AMA report on "Competition in Health Insurance" says "anti-competitive conditions exist in 83 percent of the 368 metropolitan areas studied". A Kaiser study of statistics regarding how competitive the health insurance industry is reported: "Only one state (Wisconsin) had an HHI index less than 1,500, indicating an unconcentrated (or competitive) market." Analysts say the health insurance market is "moving towards an oligopoly". Regulation benefits existing big companies. Increased regulatory costs are more efficient for a large company to bear. This leads to smaller companies merging or failing and helps prevent new ones from arising.

"normal market forces have been completely suppressed. Health care in
both places, therefore, is bureaucratic, cumbersome, wasteful,
inefficient, and unresponsive to consumer needs. [...]In general, private insurance in the United States is so heavily
regulated that it bears no relationship to what we would find in a free
marketplace. Indeed, what we call private insurance in this country is
little more than private-sector socialism.[...]

In competitive markets companies try to gain customers by lowering prices and wish to cut costs. An entrenched oligopoly behaves differently and profits from a strategy of not engaging in price wars that would cost them all money. Insurers usually benefit by simply passing along rising medical costs in the form of higher premiums (which includes a share for higher profits) since they know the market will go along.

Obamacare tries to prevent insurers from reducing medical spending

One reaction many business people have to discovering some healthcare providers are so much cheaper than others is to wonder why insurers don't do a better job of providing incentives to constrain costs. For example they might offer a kickback incentive for people who shop around and choose a lower cost provider (even beyond the limited "preferred provider" approach they do take). It seems the potential profit would be enough for more insurers to decide its worth risking a price war. The lower medical costs would let them lower premiums while still making the same or greater profit. The lower premiums would bring in more customers. Unfortunately government now works against that approach.

The public was told insurers spent too much on overhead and profit so the government needed to ensure that most of their revenue went to paying medical claims. That justification is questionable since a government report notes the "net cost of health insurance" (administration&profit) was the only part of the cost of premiums to decrease between 2005 and 2009. It was $4.5 billion/year lower.

Obamacare requires insurers to meet a "Medical Loss Ratio" (MLR) which compares their spending on medical claims to the amount they receive in premiums. If they don't spend at least 80% of their premiums on medical claims in the small&individual markets and 85% in the large group market they need to issue rebates to customers to meet that standard. This provides incentive to restrict overhead&profit, but it also provides incentive for many to increase, or at least NOT decrease medical costs.

Another way of looking at it is they need to spend at least 4 or 5.7 times as much on medical costs as they spend on overhead&profit, otherwise they are breaking the rules and will lose money by needing to give a rebate. They can't reduce medical costs much or they'll be punished by needing to give customers a rebate. They are allowed to increase profit if they increase medical spending and raise premiums. Examples illustrating this are in the appendix.

The MLR is also a tool to protect existing insurers from competition since it limits the amount of money new and growing companies can spend on sales and marketing to try to take their customers. The Government Accounting Office (GAO) estimated that in 2010 57% of companies in the individual market wouldn't meet the ratio, nor would 23% of the small group market and 20% of the large group market. Those who meet the ratio may try to get it increased to drive others out of the market. Its likely rising medical costs will be used as an excuse for the national MLR requirements to be raised, or state level standards since "under the ACA, states have the flexibility to set higher MLR standards".

The Obamacare site brags there were "$1.1 billion in rebates" this year, which is around 0.1% of total premiums. That was in exchange for an approach which reduces their incentives to control medical costs, i.e. "penny wise and pound foolish". The concern over health insurance profits is odd since they are one of the least profitable parts of healthcare. From "2007 through 2010 the annual median net profit margin for the ten largest health insurance/managed care companies ranged from 2.1% to 4.4%" and in 2008 its profit ranked "35th out of 53 top industries" and by another measure "the profit margin for health insurance companies was a modest 3.4 percent over the past year.. 87th out of 215 industries and slightly above the median of 2.2 percent.". The concern the public have shouldn't be the percentage profit they make. The concern should be that if they double medical spending and double premiums to match, then they double their $ profit even if their % profit remains the same.

Obamacare tries to prevent consumers from reducing medical spending

Insurance companies profit by betting that on average they will spend less on medical care, profit, and overhead than you pay in premiums. Most people lose money compared to what they would pay on their own. They take the bet to cover potentially astronomical costs in case they do become very ill. Most people can save money by paying for more medical costs directly and only making a bet through insurance that will cover major medical expenses using a high deductible policy. While sometimes $1,000 is called a "high deductible" you can get $5,000-$10,000 deductibles and keep a healthcare savings acccount to cover most expenses.

"nobody spends somebody else’s money as wisely or as frugally as he spends his own." - Milton Friedman.

Linking insurance to employment is a favor to big business and bad for the public

You don't have an "employer TV plan" that provides everyone the same TV, or one of a handful of choices. They pay a salary and you decide how to spend it. Companies provide health insurance as a benefit because they get a tax break. That makes it cheaper for them to buy a policy than to give you money to buy your own. If the tax break were given to individuals instead of employers , companies would just give you the money they now spend buying you insurance. You could buy a policy best for your needs, rather than theirs.

Couples could share money to buy a better family policy. Increased competition for a much larger individual&family policy market would force average prices to be comparable or lower than they are now for policies tied to employment (since the amount they pay out in claims wouldn't change). Currently the individual market is a tiny 3% of the business and gets less attention since companies focus on the much larger employer based insurance market. Less competition leads to higher rates, which hurts the unemployed and self employed who have no choice but to buy individual policies. Maintaining an individual policy would mean less concern about losing coverage or paying higher rates when laid off or changing jobs. Since you don't need to change policies there would be less concern over pre-existing conditions.

People would pay more attention than employers do to factors other than money when choosing an insurer. You likely care more than your employer about an insurer's reputation for treating its customers well if they get sick. If the entire market were individual policies this would lead many insurers to compete partly based on customer service.

Politicians help insurers by linking insurance to employment since it leads them to sell more expensive lower deductible policies. That benefits healthcare providers who would rather you never considered price. Big companies negotiate better group policy deals than small companies. Big companies have an advantage trying to recruit good people because they can offer better benefits for the same cost. Tax breaks for employers to provide insurance are a gift from politicians to big companies at the expense of small. Shift the tax break to individuals, then after the market changes to individuals repeal it and lower tax rates to compensate. Those who can afford better insurance benefit from the tax break more than the less fortunate so it is a regressive policy.

Imagine if there were credible concerns the government might institute a "single payer food plan" and replace all restaurants with government run cafeterias in 6 months. Would you go to the trouble to start or invest in a new restaurant? People will only expend resources to start a new business if there is a possibility they can make enough money to be worth the investment of time and/or money.

There are people with creative ideas for providing better health insurance (or something to replace the health insurance model) such as those professor Herzlinger referred to. Unfortunately there has been a credible fear for many years the government might soon replace the health insurance industry with a single payer approach. Many business people would think it far too great a risk to start or fund a health insurance related company. This benefits all the existing companies by protecting them from competition,as long as they keep single payer from actually happening.

It takes several years to build a new business. To sell your stock later to benefit from doing so you need the public to believe the company will survive in the future or they wouldn't want to buy it. Many entrepreneurs and investors likely need to be confident that single payer won't happen for at very least the next 10-20 years to consider it worth the risk rather than pursuing other business ideas. The government needs to commit to not taking over the health insurance market to allow new innovators to come in and compete with the existing companies.

The same problem exists to varying degrees in many healthcare related niches (like healthcare information systems) where fewer entrepreneurs start new businesses due to fear government will either take over their niche or change the rules so much their business either is no longer viable or would need to spend too much money to redo a product. In the area of healthcare provision itself Forbes notes: "When it comes to new healthcare services ventures, the law punishes
excess return on invested capital. Most of the venture capital that
seeded new healthcare services ventures has dried up." The health insurance exchanges government is creatingare something the private sector obviously would have considered if it didn't fear government intervention, which obviously has occured (and government is spending far more to build them than private companies would have needed to create them if left to themselves). Goverment is doing the exchanges to ensure they can limit choices to policies it approves of, and to have a framework to collect information it wants.

State governments restrict free trade within the United States to help insurers

Large companies are able to have entities licensed separately in multiple states after going through lots of costly and time consuming regulatory hurdles, which would be difficult or impossible for a new insurance company intending to sell via the internet to do. They could only sell you policies that meet the perhaps expensive regulatory requirements in your state. Imagine if when Apple were a tiny new company you hadn't been allowed to buy a computer from it unless it operated in the state you lived in and offered a special version of its products customized to your state. Its large enough today to do things like that, but it would cost more, and when it first began it wouldn't have been able to.

New companies need creative strategies to find their initial customers. A company might find a way to target say everyone who works in occupation X through trade publications and web sites. They might have a large enough market to attract investors if they could serve customers nationally, but may not have enough potential customers within one state to make it worthwhile to start the business.

The Interstate Commerce Clause of the US Constitution was meant to guarantee free and open trade between the states. A huge free trade zone is one of the secrets of our success which Europe for example hopes to copy. The clause could be used to force states to allow you to purchase insurance across state lines, although it would take time for companies to begin to take advantage of it once it happens. It is too soon to assess any benefit from the few states that recently began to open up their borders a bit. Its likely companies are waiting to be sure the laws won't be changed again, and are uncertain in general what national&state healthcare law shifts might occur in the near future so they may be hesitant to change strategy and expand into new markets.

The government protects drug companies from competition.

"But the pipeline for new drugs isn’t drying up because the industry isn’t spending enough money developing new drugs (about $1 billion per successful Food and Drug Administration-approved drug), but because FDA requirements for drug development and approval have become enormously complex, time-consuming, and expensive."

This benefits existing large companies who can afford it at the expense of innovative new startups that can't. The situation has deteriorated over time. Data from the Tufts Center for the Study of Drug Development showed that "From 1999 to 2005, as the Tufts group has shown, the average length of a
clinical trial increased by 70 percent; the average number of routine
procedures per trial increased by 65 percent; and the average clinical
trial staff work burden increased by 67 percent.". the total cost to develop a new drug (inflation adjusted to 2005 dollars) rose from $393 million average for 1970-1982 up to $1,241 million during 1990-2003. A Forbes article gives a more recent figure that adds in all R&D and shows $5.8 billion per drug approved (factoring in all R&D), and another notes it can cost up to $12 billion. These costs eventually are paid for by the healthcare system.

They note elsewhere it can take over a decade to approve new treatments and since FDA approval is also required for new medical devices

"Venture capital for biotech is also being cut back, with investors
citing an unpredictable and expensive regulatory process. American
patients are also waiting longer for access to some new medicines and
medical devices that have already been approved in Europe."

Bureaucratic inefficiency and caution (they'd rather not be blamed for an unsafe drug, but ignore the lives lost waiting fornew drugs to be approved) is likely the explanation for most government delays. However the delays&cost protect existing products from new competitors so they have incentive to help perpetuate a broken system. The FDA has proposed making the process "more onerous". The Milliken Institute reported last year that the FDA's uncertain and lengthy process holds back innovation and limits the funding available to create new medical devices:

"In Europe, many devices are approved in half the time it takes for similar approvals by the FDA... The average time for 510(k) products and (Pre Market Approval) PMAs has risen by 45 and 76 percent, respectively,since 2007"

A prominent cataract surgeon recently noted FDA stands for "For Development Abroad" and that many companies with products approved in Europe are "abandoning the goal of FDA approval entirely" due to time&expense so we'll never get them. A paper from the Progressive Policy Institute on "How the FDA Impedes Innovation: A Case Study in Overregulation" wonders if the first Apple computer would have been launched if it had to go through the equivalent of FDA approval. It says of a recent product undergoing scrutiny:

"If the FDA fails to approve, Melafind, it would be the equivalent of rejecting the first cell phone on the grounds that callers might mishear important messages"

"I have attended countless meetings of doctors and research scientists in which the role of the FDA was discussed. The uniform view is that the FDA slows down medical progress by about three to five years. These doctors, however, are not willing to state this publicly for fear of administrative revenge"

Better treatments lower medical costs, so this also helps keep healthcare prices higher than they would be otherwise. The same professor more recently noted there is a "wealth of evidence against the FDA’s dangerous worldview". Doctors from the American Council on Science and Health pointed out a couple of years ago that more stringent FDA regulations squashed innovation in antibiotics:

"In successive four-year periods beginning in 1983, the number of new
antibiotics approved has dropped from 16 (in the period from 1983 to
1987), to 14, 10, 7, and 4 (in the period from 2003 to 2007). And it’s
getting worse, not better: only two since 2007."

Last year the Wall Street Journal explained shortages of important drugs were partly due to the fact that "It takes as long as two and a half years to receive FDA manufacturing approval for a generic" so new companies can't quickly step in to fill the demand. In free markets when there is a shortage prices rise, which inspires new companies to step in. In this case government has kept prices low for existing generic drugs. That ensures there isn't enough profit potential for other companies to spend the time&money to be approved. That gives existing manufacturers time to ramp up production without competition getting there first.

There are better ways to monitor product safety this site will consider in the future (one possibility would be private safety labels that compete to earn the trust of doctors and the public, while competing to reduce cost and time for approval, additionally motivated to do a good job by payouts if any problems are found).

Government protects lawyers&insurers preventing reform of the malpractice system

In comparison only $6 billion in total compensation was received by patients in 2011. It was paid for out of $31 billion in direct costs for medical malpractice. It seems likely a more efficient system can be created, given that the payments to patients were 22% of the costs while legal costs were 36%. Profits were 31% of those costs and "The average profit margin for the top 10 medical malpractice insurers was twice as high as the average profit margin of the 50 most profitable Fortune 500 companies". This suggest the likelihood regulations deter the creation of more competitively priced insurers,or that new startups are scared off by the prospect of the continued threat of uncertain future reform of the system. The existence of the threat, without the reality of reform, helps existing companies.

Another page reports different figures of 17.5% "received by patient" and 17.5% "attorney fees and litigation costs" which perhaps only reflect legal costs of one side. 72% of claims close without a payment to the patient, and 93% of juries side with the doctor. Some estimate "90 percent of legitimate medical injuries are not properly compensated. That leaves many patients - especially the poor, minorities and elderly - without the compensation they desperately deserve".

The current "jackpot justice" system is broken from the perspective of most except lawyers and malpractice insurers who benefit. Its likely there are creative approaches entrepreneurs would invent to improve the system if laws enshrining the current approach were changed. Politicians have kept the current status quo system intact for decades despite talk of the need for reform. This seems partly due to infighting of the various stakeholders who wish to legislate a system that benefits themselves, including the politically connectedtrial lawyers and malpractice insurers trying to keep their profits.

These are all just tip of the iceberg examples of government driving up costs

Anti-competitive policies are widespread in the industry and you'll never hear about most of them. Government intervention increases prices in many other ways. Obamacare established over "100 new committees for lobbyists to jostle for handouts from Uncle Sam.". Logrolling to gain votes to pass the bill kept adding favors for certain players, while those who didn't play ball well enough were punished. In some cases they were hit with taxes or regulations that appear to be punishment on the surface, but in reality prevent existing players from losing even more money to new competitors . Increasing taxes on healthcare won't reduce its cost. Yet a list of taxes included in Obamacare includes:

The Wall Street Journal reports the medical device tax has already led companies to reduce R&D, lay people off and cancel expansions. They may have lacked political clout because "Eighty percent of device companies have fewer than 50 employees". Of course some existing businesses favor the tax since it deters new competition which might cost them even more. Fewer people will be inspired to start new companies because the tax "could consume more than 65% of a typical company’s profits". Even Democratic Senator Elizabeth Warren recognizes

"When Congress taxes the sale of a specific product through an excise
tax, as the Affordable Care Act does with medical devices, it too often
disproportionately impacts the small companies with the narrowest
financial margins and the broadest innovative potential. It also pushes
companies of all sizes to cut back on research and development for
life-saving products"

Perhaps 45,000 jobs might be lost in the US. A Forbes column points out reductions in R&D lead to fewer new devices so patients may die earlier. It gives estimates that:

" the tax will lead to a reduction in research and development by about $2 billion every year... effect of the tax will be about one million life-years lost annually."

Obamacare also rewarded the more politically connected older crowd by shifting costs onto younger people who on average aren't as well off. Insurers usually charged 6-7 times as much for older people but starting in 2014 they can only charge 3 times as much which is estimated to increase the cost to the young by 17%, or45% according another source. They made sure to still keep the college activist vote by letting them stay on their parent's policies until they are 26.

MIT economist Amy Finkelstein in 2007 "published a paper estimating that the introduction of Medicare accounted for a 23 percent increase in total hospital expenditures between 1965 and 1970, with an even larger effect in the subsequent five years. ".

Government hides the true cost of some programs by postponing them

Private insurers need to plan to have enough money in the future to pay for claims. Their stock price is based on their expected future profit, how much revenue will exceed their expenses for the foreseeable future. In contrast, politicians often make promises to win votes now for future benefits that exceed the money they will have to pay for them.

When a program proposes to pay out more in future benefits than the money it takes in to pay them they have an unfunded liability. The "present value" of an unfunded obligation is how much you would need today in an account earning interest to cover future payments. The US Treasury department's annual "Financial Report of the Federal Government" most recently estimated the present value of the unfunded liabilities for Medicare at $38.8 trillion. The is about $123 thousand per person in the US. Just two years before it had estimated a value of $89.5 trillion, about $285 thousand per person. It is unclear if the figures have gotten more optimistic, despite slower than expected economic growth, due to real improvements or due to political pressure. Medicare's own Chief Actuary stated in the most recent Trustees report that

“the financial projections shown in this report for Medicare do not represent a reasonable expectation for actual program operations in either the short range…or the long range.”

Government health insurance is inefficient, politically influenced, and drives up private prices

The ones that do take government funded patients make up the loss in some cases by cutting the quality of care leading to higher death rates. Others cover the shortage by raising rates for private patients. A study based on 2007 data (it would be higher today) estimated this raised the cost to private patients by $90 billion extra, raising average spending for a family of four by $1,788. As more people use government healthcare programs the cost shift will increase, raising private rates so more people will drop private insurance they can't afford and get government help.

"Doctors are paid not by how much time they spend with patients, how well they listen or how hard they think about what could be wrong, but by how much they write down. And the rules for what we have to write are Byzantine: Medicare’s explanation takes 87 pages. "

Large programs become so complicatedthey develop all sorts of unintended problems, as this healthcare blog points out:

"Under Medicare’s payment system, however, a specialist can only bill Medicare the full fee for treating one of the five conditions during a single visit. If she treats the other four, she can only bill half price for those services. It’s even worse for primary care physicians. They cannot bill anything for treating the additional four conditions."

Government programs pretend to be more efficient than they actually are by skimping on things the public may not notice even if itwill cost them more in the long run. For instance they spend less to deter fraud. That simply means they pay more out in fraud costs, which they admit but try to downplay. The New York Times and Health Affairs reported the goverment's Centers for Medicare and Medicaid Services estimates $65 billion in Medicare&Medicare improper payments were made. A study in April 2012 by a former CMS administrator and a RAND analyst put fraud and abuse cost higher at $98 billion in 2011, which is around 10% of their cost in contrast to private insurers estimated "1 to 1.5 percent" fraud loss.

More spending by government doesn't lower prices

Many people complain that healthcare costs more than in other countries and mistakenly assume that handing more of the system to government will somehow reduce costs. Yet government already spends about half of all healthcare money in the US, 49% to cover just 31% of the population (that is according to official figures, anothersuggests it spends 60%).. That doesn't mean it would cost 1.58 times as much if the government spent all healthcare dollars. The situation is complicated sincea higher percentage of their patients are elderly and more likely to require care. However if they got rid of private insurance they wouldn't be able to shift costs to it. Any of theways government already drives up costs would get worse. Those figures likely underestimate the true cost of government healthcare since they don't take into account the way government shifts its costs into the future and into other categories of spending like tax collection.

While prices have been rising, the percentage of healthcare expenditures made by government has been growing, while the "out of pocket" share which inspires people to price shop has fallen:

This page has graphs of OECD data showing that internationally the share of healthcare spending done out of pocket is a strong predictor of total per capita spending on healthcare, and of healthcare's share of GDP. The smaller fraction spent out of of pocket, the more expensive the healthcare system is.

Even ignoring the costs it shifts onto the private sector and into the future, our government already spends more than most other countries per capita on healthcare even though it is doing a smaller fraction of the total spending. This is 2009 data from the OECD for major countries, the line for the US is the longest:

A larger graph showing the same result with WHO data is in the appendix. Increasing the share of government spending on healthcare won't address reasons our costs are higher.Many mistakenly think the % of spending by government for healthcare indicateshow much of a role a government has in the industry. In reality laws which impact an industry greatly may not require much spending, such as those which limit competition.Therest of the worldeffectively "free rides" on the money the United States spends to research and develop new drugs.Variations in the price of goods and salaries in the rest of a country's economy can have an influence on healthcare in ways that aren't apparent just looking at the healthcare numbers in isolation. For instance the salary level for other careers someone might enter instead of say nursing may help drive up nursing salaries to attract qualified workers. Despitethe major flaws in our healthcare systemwe are partly paying for quality in many areas. Itleads the world in areas like cancer survival rates. Some of the negative comments you'll see about the quality of the system are based on rankings such as from the WHO that rate a system more highlydue to factors that are partly determined by what fraction of the bills are paid by government. Naturally people who wish the government to have a greater role in healthcarecite rankings based on how large a role it has. Other negative comments about the state of American health neglect to note that some negative statistics have nothing to do with the quality of the healthcare system. Lifestyle differences such as obesity can lead to a greater incidence of problems even if the survival rate is higher for those who do become ill. Some articles neglect to mention the major role genetics and lifestyle plays in life expectancy (if you exclude things like violence related deaths, we may have the highest life expectancy in the OECD), or compare apples and orangesby using different definitions to measure things like infant mortality.Unfortunately in many areas there is a point of diminishing returns where it costs a lot more to get a little bit higher quality, a slightly higher survival rate or a few more days of life. In many areas the cost-benefit curve seems to be exponential, socosts should be expected to rise rapidly if you want higher quality.The typical value a country places on a little better result will vary, as it will between individuals. It seems appropriate to let people decide for themselves how much they want to spend rather than imposing a one size fits all government standard. We are a wealthy country and that means that we might choose to spend more on healthcare than other countries. Unfortunately it also means government has been able to get away with policies that waste a lot of money without enough of the public waking up to complain.

Comparing costs between countries can be misleading since sometimes costs are merely shifted into other categories. For instance countries that cover the cost of medical education don't need to pay doctors as much since they don't have to pay off medical school bills. The costs of medical school are merely shifted from the healthcare category into their budget category for education. As this site pointed outpreviously, for certain purposes like calculation of "total expenditures" of government, most international economic data sources oddly place some government spending on business-like tasks funded by fees into the business sector to downplay government spending. It is not clear without further research how many ways the international figures for government healthcare spendinghides healthcare spending in non-healthcare categories to downplay its costs even beyond the example of education. This testimony from a Congressional hearing points out that:

Economists have long known that international health care spending comparisons are fraught with potential error. Even for uncomplicated dental fillings, reimbursement data underestimate total costs by 50% in nine European countries [...] An OECD project to harmonize national accounting methods began in 200, but even when methods are harmonized, the choice of a price adjustment can alter hospital costs by as much as 400%.

The uninsured are a minor part of the costs

This
article began by noting that massive government intervention into
healthcare isn't needed to address the problem of providing healthcare
to the uninsured. It is worth noting that they also aren't a major part of the cost problem. A government approach even best case couldn't do much to cut the country's overall healthcare costs, it would only be reducing a small percentage of the previously uninsured population's costs by leading them to use regular care rather than more expensive emergency care. They are a small part of the costs in comparison to the overhead the new law added:

Though supporters claim the mandate will reduce cost shifting from uninsured free riders to the insured, the latter will see no savings. Researchers at the left-leaning Urban Institute estimate that in 2008, such cost shifting amounted to just $56 billion, or 2% of total health spending, and increased premiums by "at most 1.7 percent." For comparison, the Dartmouth Institute for Health Policy and Clinical Practice estimates we waste more than 14 times that amount on unnecessary care. More important, the Commonwealth Fund study shows the federal law has already increased premiums by more than the mandate could reduce them by eliminating free riding.

They represent a small slice of the healthcare spending pie. Reducing their costs a bit does nothing to address the factors that lead to making that pie constantly bigger. Addressing an issue that will say grow healthcare costs by X% per year and will eventually double costs is more important than a factor which is say 2% of costs even if it might rise to 5% of the costs. The fine for Obamacare is less than it would cost to buy insurance, so many will just pay the fine (as they do in Massachusetts now). The reason they didn't have insurance to begin with is since they couldn't afford it. This hurts the poor. The Federal CMS says 47.8% of the uninsured are "young and healthy" who often realize it is a better bet for them not to have insurance than to waste money on it (especially if they can get it even after they are sick). Since Obamacare raises the rates on the young, it will provide incentive for more young people to go uninsured. Some say Obamcare may *increase* the number of uninsured due to all its problems once it fully kicks in. The number of insured people has been increasing at a steady rate which may not have even been been effected much by the law so far, it appears to be merely be recovering from a small dip during the recession:

Pre-existing conditions can be handled better. Obamacare punishes the best insurers.

Pre-existing conditions are a concern, but only for a small number of people and they have nothing to do with most of Obamacare. If people keep their own individual policies when they switch jobs, pre-existing conditions become less of an issue. As this page notes even without that: "An HHS survey found that in 2001, only 1 percent of Americans had ever been denied health insurance."

The market was already addressing the issue of those concerned about losing a policy if they got sick: " the vast majority of insurance products (75 percent) provided guaranteed renewability before they were required to do so by government. ". If insurance were a true free market where individuals bought their own policies they would be sure to shop for such features.

Even before Obamacare existed private insurance companies were already tackling the issue of buying insurance after you discover a medical problem: "UnitedHealth Group, one of the nation's largest health insurers, just announced a product that gives customers the right to buy medical insurance in the future. The future premium will be based on the customer's current health status, even if their health worsens in the interim." The New York Times reported that " "What this product is designed to do, for a very modest premium, is to essentially protect your insurability for the future,".

Those who do fall through the cracks would effectively be in the same position as other uninsured people who couldn't afford insurance. They could be helped the same way, either by charity or if the government is involved via a voucher to pay for insurance. Private companies should be willing to sell a policy to anyone and merely charge more to factor in the cost of paying for treatment and potential side effects of a known condition.

The Obamacare approach instead forces insurance companies to not discriminate against those with a pre-existing condition. This approach has been tried: "Massachusetts residents are increasingly 'gaming' the system: purchasing insurance when they know they are going to use healthcare services, then dropping it when they no longer need it." Some who take this approach are young and may have money but decide it is a better bet not to spend the money for insurance. If they do get sick they may buy the best insurance possible while they are sick, paying extra to be sure everything is covered, including perhaps an unnecessary level of "defensive medicine" to be safe, with the lowest out of pocket cost and the best customer service Those that normally can't afford insurance may also borrow or splurge to get the best policy while they are sick. The best insurers are likely to bear a disproportionate part of the cost of covering pre-existing conditions. This is a favor to the majority of the insurance industry at the expense of the best insurance companies.

In a free market those who have the bad luck to get sick without having made prior arrangements for insurance would either need to foot the bill themselves for a higher priced insurance policy or if they can't afford to do so would at least need to deal with the stigma of getting help from charities or government. Those who are later well enough to work might be asked to pay back over time some of the benefits they received. These factors would cut down on the incentive to "game" the system by going without insurance.

Prices rise more slowly or drop in competitive markets with less government intervention

Some people aren't aware that the overall inflation level in most of the economy isn't driven by companies trying to make more money, it is driven by the size of the money supply which varies largely due to government policies. Price increases are bad for business in true free markets since customers will switch to competitors. Companies are able to increase prices when government limits competition. The government has a consumer price index for "information technology, hardware, and services" that starts at the end of 1988 which provides a useful contrast with some other prices:

Competition keeps costs for apparel and vehicles restrained (so they grow slower than the overall inflation and salaries do) and lowers computer related prices. The second fastest growing price shown is for food. Even though government doesn't get into the food business the way it gets into the insurance business, government intervention does prop those prices up "Many farm subsidies drive food prices up, not down."Many companies within the food production chain also use government regulations to limit competition (e.g. restricting foreign products at times) so it is less of a free market than the computer industry.

Companies constantly look for ways to be more efficient to lower their costs to lower prices to gain more customers. They can use lower costs to reap more profit only temporarily until competitors lower their prices and force them to as well. If a computer chip company finds a less expensive material to use and lowers their price, then a tablet computer that uses that chip can lower its price. Price changes happen "bottom up" because someone actually found a way to reduce costs.

Government programs that try to control costs do so by arbitrarily deciding what price to set for something. The problem is they don't know what the price really should be since they aren't the ones actually producing the end product or the parts that go into it. If a government employee were allowed to set the price for new tablet computers they wouldn't have the information they need to do it. They have no way of knowing that some creative person at a computer chip company could find a way to use a new material and lower the price. If the bureaucrat said you must charge $X for all tablet computers, it is likely that won't match the price a free market would have set for them. If the price is too high, we would be paying too much and wasting money. If its too low, many companies may say "its not worth it, we won't make a tablet computer". Obviously if the price were set to $2000 we would be wasting money. If it were set to $10 no company would sell a tablet computer. At a price of $50 then some companies might sell lower quality tablets, but none would sell a high quality tablet at that price (at the moment, obviously prices will drop over time).

Economists object to price controls as engaging in wishful thinking that you can accurately set prices "top down" by guessing how much it really needs to cost to produce something. Some estimates will be high and money will be wasted. Others will be low, leading either to shortages, rationing and waiting lines or lower quality products. Since government price setters lack the information to provide a logical reason justifying what a price should be, there is potential for the arbitrary choice to be influenced by political factors. Companies will have incentive to use lobbyists and connections to try to get their prices raised while the less politically connected see their prices lowered. Government healthcare programs exhibit all the failings of any other price control system. One study estimates that if US drug prices were regulated like other countries "the result would be a decline in industry R&D of between 23.4 and
32.7 percent. " Another study suggests "permitting Medicare to negotiate pharmaceutical prices would result in the loss of 5 million life-years annually" and another that "price controls/regulatory regime in Europe produced delays in
introducing statins that have led to the loss of literally tens of
thousands of lives over a five year period".

Some people think of profit as "waste", whereas in reality if the government doesn't interfere, it is an incentive to constantly improve and to start new companies to do better than existing ones. If a company cuts its costs by 2% each year, after 5 years its prices can be 10% lower (in inflation adjusted dollars, inflation may lead the actual $ cost to be higher). They do it to bring in more customers to gain more profit. That will save its customers more than if say government had outlawed its 5% profit share and removed its motivation to improve. Even if it only lowered its prices 8% and took the rest as profit, its customers would still be better off in the long run than if the incentive to improve had been taken away by outlawing its profit. Profit rewards people for taking the risk to invest in a new innovative company which would otherwise not exist.

Unfortunately if the government prevents competition, then an oligopoly of suppliers may be content to not engage in price wars to gain new customers and simply maintain their existing market share. If they all simply let their costs double and their prices double, then their profits double. The public shouldn't focus on the % profit of an industry, but whether government is preventing competition and allows costs to rise so the actual $ profit rises.

Healthcare policies run counter to basic economics&business sense

Politicians often pretend they are acting in the public's interest when they enact healthcare policies even when the
ideas are so contrary to basic business&economic sense they would
lead to laughter if they proposed the equivalent laws for a mostly free market like
the computer industry. Unfortunately it can be difficult to isolate all the factors involved in costs so they manage to create flawed rationalizations that fool a public which doesn't pay close attention. Most people don't bother learning about topics they don't find of interest so they don't know much about economicsso they don't spot policy flaws. Unfortunately some are confused by hearing people who are supposedly "experts" in healthcare economics push questionable policies based on ideas like "competition is always wasteful". The problem is that not all "experts" truly are. Some arepushing views they realize benefit their industry at the expense of the public. Others are merely stuck in an obsolete Soviet style mindset.

Nobel laureate economist Ronald Coase recently critiqued many economists as being out of touch with the business world in their ivory towers : "Saving Economics from the Economists [...] Economics
as currently presented in textbooks and taught in the classroom does
not have much to do with business management, and still less with
entrepreneurship. The degree to which economics is isolated from the
ordinary business of life is extraordinary and unfortunate." Nobel laureate economist Hayek's nobel lecturediscussed the "Pretense of knowledge" and pointed out that "Unlike
the position that exists in the physical sciences, in economics
and other disciplines that deal with essentially complex
phenomena, the aspects of the events to be accounted for about
which we can get quantitative data are necessarily limited and
may not include the important ones." i.e. they may focus on the trees and miss the big picture forest.

Healthcare policy analyststhat narrowly focus on a set of data may exhibit a "pretense of knowledge" about the topic, but for instance lack an understanding of theway executives in a particular market think. They may miss important factors including seemingly obvious ones like that major government interventions indicate a market isn't truly an entrepreneurial free market and shouldn't be analyzed as if it were.

Unfortunately many niches of social science, including some within economics, are more prone to problems than "hard science" disciplines where there may be clear cut ways to use experiments to let reality resolve disputes. Nobel laureate physicist Richard Feynmanreferred to these areas as being "cargo cult science" which mimic the trappings of real science but which lack a certain willingness to be skeptical of their own work. Unfortunately there are many poor quality studies published : "Other meta-research experts have confirmed that similar issues distort research in all fields of science, from physics to economics (where the highly regarded economists J. Bradford DeLong and Kevin Lang once showed how a remarkably consistent paucity of strong evidence in published economics studies made it unlikely that any of them were right). ". When there isn't much data available on a topic, or there are many complicating factors, analyzing information can be like looking at an ink blot or cloud to try to see a recognizable object and sometimes poor quality statistics can be used to claim you have found it.

Many healthcare analysts genuinely believe in policies that run counter to most economic and business theories. The theory of "paradigm shifts" in science acknowledges that the advancement of knowledge in any field is a human process which can at times be dysfunctional, even occasionally in hard sciences.Certain ideas (like "competition is always wasteful") can become entrenched in a fieldeven in the face of compelling counter evidence, and not be overturned until the current experts are replaced by new ones.Unfortunately that can be difficult since upcoming students get to pick what area they go into. The sharpest students may be skeptical of the status quo in an area and be motivated to work in a different niche rather than try to buck the establishment. In this case there are also monetary rewards for backing certain policies. Some policy wonks may realize they back viewpoints favorable to industry, not all researchers are motivated by finding the truth of an issue.

It can be difficult for the public to assess who to trust if they don't know much about economics and business since even a subset ofthose with credentials like Nobel Prizes can sometimes be off target when they are writing on topics outside their niche. The Skeptics Dictionary says "The Nobel disease has been defined as 'an affliction of certain Nobel
Prize recipients which causes them to embrace strange or scientifically
unsound ideas, usually later in life.'". Some of them are creative and have many ideas, and a fraction of those ideas matched reality and led to a major contribution to their field. Those creative ideas may however only sometimes turn out to match reality and at other times lead them astray in other niches even within their general field. A trade economist may or may not do well writing about other areas of economics, and may or may not be biased towards pushing for favors for special interest groups he likes.

It is useful for the public to learn to be skeptical whether an "expert" may be pushing a favor for a special interest niche, or be pushing outdated concepts for emotional reasons like that "competition is always wasteful". A nobel laureate economist recently suggested that somenobel prize winners are idiots.. a comment some suspect was driven by the fact that many viewhim that way for comments outside his niche.Some Nobel laureates have generalist mindsets (many won prizes for broad contributions to the field) and can apply their intellectual ability productively to many niches, while others are specialists whose recognized contributions are limited to a fairly narrow niche and they have trouble "seeing the forest for the trees" when confronting big picture issues.

Other healthcare issues will be addressed in upcoming pages on this site.

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World Healthcare spending

Using 2009 data from the WHO available onthis site,
this is the amount spent on healthcare per capita by government and
total for each country whose government spends more than the world
average. This should give an even broader perspective for where the US
fits in:

Medical Loss Ratios

To illustrate the problem with Medical Loss Ratios,
consider the example of a small group insurer that exactly met the 20%
ratio with $100 million in premiums. It spent $80 million in overhead
and $20 million in profit. Lets say next year it has the same number of
customers who require the same amount of medical care, and consider what
would happen if they changed their spending on medical costs or
overhead. Case "a" in the chart below is where they are at now

Case "b" shows the claimed intent of the law to prevent too much overhead&profit. If they tried to increase profit by $5 million and raised premiums to cover it, it wouldn't work because they'd need to rebate the increase. They'd be violating the rules since their MLR only allows them $20 in overhead for that much medical spending.

In case "c" they tried to do a positive thing by reducing medical costs by $5 million and passing the savings along by reducing premiums, while keeping their profit and overhead the same. Unfortunately this would drop their MLR so they would be punished if they did this by needing to pay a rebate to customers. For $75 million in medical spending they are only allowed $18.75 in overhead&profit, so they'd need to lose $1.25 million in profit to meet the MLR.

Case "d" illustrates what might happen if they gave customers a kickback to choose lower cost providers. The customer incentives effectively reduce premiums by $5 million, and it leads to $10 million in reduced medical costs (note: these $ figures are chosen to illustrate the point and aren't estimates of what the real world figure might be) . Customers benefit, and they make more profit which is what inspires them to do it in the first place (though part of the $5 million extra they spend goes towards implementing the kickback program). Unfortunately if they tried this they would be punished for breaking the rules since they are only allowed $17.5 million in overhead for that much medical spending (not $25 million) so they'd wind up earning less money instead of more.

Case "e" illustrates a way for them to meet the MLR and make $5 million more in profit. They pay higher medical costs and use that to justify a premium increase, slipping in some more profit while at it and telling the public "we are meeting government guidelines for a reasonable profit". In competitive markets companies hesitate to raise prices for fear of losing customers, but in most non-competitive insurance markets its likely they will all accept the cost increases from providers and pass them along.